Skyrocketing home insurance rates deter homebuyers

By Doug Bailey

Despite falling interest rates, potential homebuyers are meeting a new, formidable obstacle: the skyrocketing cost of home insurance. The rising expense is adding another layer of complexity to the home-buying process, frustrating both buyers and lenders, and stifling what could have been a more active real estate market, experts say.

Homeowners and potential buyers are now facing insurance premiums that are rising at an unprecedented rate. These soaring costs, driven by the increased frequency of natural disasters and inflationary pressures, have caused many buyers to either pause their search or face hurdles in securing financing.

In July, a record 60,000 prospective homebuyers canceled their purchase agreements, according to real estate brokerage Redfin. That represented 16% of the homes that went under contract that month and was the highest share of cancellations on record going back to 2017, when the company first began tracking the data.

Insurance might not have been the only reason for the high number of cancellations, but experts believe it was a major factor.

Insurance prices are 'catching people off guard'

“The [price of home] insurance is catching people off guard if they can even find it because depending on where they live, carriers are just making it a lot more challenging to find insurance,” said Travis Hodges, managing director at insurance broker VIU by HUB. “

Hodges said insurers are also demanding closer inspection of properties in some areas before signing off on the sale, slowing the closings and increasing costs.

The cost of home insurance is still increasing due to the impact inflation has had on the earlier losses experienced by the insurance company, the elevated cost of building materials, and the high likelihood of future extreme weather-related losses, according to Bankrate. Across the country, premiums have jumped 23% since 2023. The average premium in February 2024 was about $141 a month for a home with $250,000 worth of dwelling insurance.

Meanwhile, according to recent census data, a record 13.4% of homeowners in the U.S. now lack home insurance, a staggering figure that highlights the growing inaccessibility of coverage. This uninsured rate not only exposes homeowners to risk but also disrupts the mortgage approval process, as lenders typically require insurance as a condition of financing. The volatility in the insurance market has delayed loan approvals, with insurers hesitant to issue policies in certain regions prone to natural disasters, such as California and Florida. This leaves both lenders and buyers in limbo, causing significant delays in the closing process.

“Florida, California, Texas, and New York are the hardest, most challenging states to insure in,” said Hodges.” They are also the most popular. So, you have the largest populace in places that are the hardest to insure. It is the perfect storm, no pun intended.”

Buyer reconsidering options

The combination of delayed loan approvals and unexpectedly high premiums is forcing buyers to reconsider their options, while sellers are left scrambling to find new buyers.

Cash buyers, however, are reaping the benefits of these challenges. As the insurance market becomes more unpredictable, the share of cash buyers in the real estate market has surged to record levels.

Home buyers who paid cash accounted for 32% of home sales in January, marking the highest rate since 2014, according to the National Association of Realtors. Many used the equity from a prior home sale. These buyers bypass the need for lender-mandated insurance, allowing them to close deals more quickly and avoid the insurance-related pitfalls plaguing traditional buyers.

This trend is worsening the divide between those who can afford to pay cash and those who rely on financing to buy a home.

The growing number of cash buyers also raises concerns about housing affordability and accessibility. With traditional buyers facing greater obstacles, more homes are being snapped up by those with the resources to pay in full, which could drive home prices higher and reduce opportunities for first-time homebuyers. This shift in the market underscores the broader impact that rising insurance costs are having on the housing sector.

“It’s a challenging time because a lot of the insurance companies are struggling with profitability,” Hodges said. “And so obviously those challenges and costs are shared and passed on to the consumer. And in that house buying process, that insurance price becomes a lot bigger [part] of the monthly payment that buyers were not anticipating or planning for.”

Hodges recommends that prospective home buyers look carefully at options available before buying and work with insurance professionals who can find ways to maximize coverage without increasing the financial burden.

“Things like do you have the proper deductible, do you have the proper coverage do you have the proper package policies,” he said. “Your average consumer is not supposed to know those things, or they are just built into the closing. But those things can help make it more financially tolerable. So, I just would encourage people to shop early for insurance.”

As insurance premiums continue to rise and market volatility persists, the outlook for homebuyers stays uncertain. Falling interest rates may offer some relief, but without addressing the ballooning costs of insurance, many prospective homeowners may find themselves locked out of the market altogether.